KeyBanc Upgrades Residential Solar Companies on Growth Prospects

The recent weakness in the shares of some residential solar companies has created "an attractive entry point," according to new KeyBanc report.

KeyBanc analyst Sophie Karp initiated coverage of the three top companies in the U.S. residential solar space — Sunnova Energy International (NOVA) , Sunrun (RUN - Get Report) and Vivint Solar (VSLR - Get Report) — each with an overweight recommendation. Together, the companies control about a fifth of the market.

Vivint Solar shares were up 4.3% on the NYSE on Tuesday to $8.65, while Sunrun was up 0.8% at $15.89 and Sunnova stock was down 7.6% at $10.36. (Sunnova reported its second-quarter results on Monday, including a wider loss versus a year ago.)

Karp's target price is $12 for Vivint, which implies a 44% return from Monday's close. Her $19 target for Sunrun implies a 20% return and the $13 Sunnova target a 16% return, both from Monday's close.

Amid the general market volatility, Sunrun shares have dimmed from their 52-week high of $21.42 in mid-July, while Sunnova shares are off their 52-week high of $12 on Aug. 15 and Vivint stock is down from its high of $9.82 on Aug. 8.

Karp said residential solar stocks have "significant growth prospects" given the large U.S. market with low penetration that is "barely scratching the surface" and a "constructive regulatory framework."

The industry is also benefiting from a "favorable cost equation," Karp says. Rising electricity rates have more consumers considering solar options. At the same time, the cost of solar equipment costs is falling.

Karp says Sunrun offers the best growth prospects, saying it is "the most efficient capital recycler in the space and has distinguished itself with significant cost discipline and sagacious financial execution."

Meantime, Vivint offers the best margin of safety, Karp said. "VSLR dealt with some growing pains in 2018, and as the company returned to profitable growth in 2019, the shares reacted positively, outperforming the peers and the [Russell 2000 index] by a wide margin," she wrote.

While the stock has more than doubled this year, it still trades at a discount to the value of its existing portfolio, Karp says, "creating an attractive margin of safety since, at these levels, investors essentially pay nothing for the growth."

The analyst said Sunnova, the smallest of the three companies, offers "the most significant operating leverage owing to its dealer-only operating model."

Sunnova shares "lie somewhere in between VSLR and RUN in terms of the margin of safety, since the net value of NOVA's existing portfolio of assets amounts to ~$9/share," Karp says.

She added that she expected the company to "grow aggressively in the 2019-2020 time frame."